Description
Book SynopsisFeaturing key topics within finance, small business management, and entrepreneurship to develop and maintain prosperous business ventures
With a comprehensive and organized approach to fundamental financial theories, tools, and management techniques, Entrepreneurial Finance: Fundamentals of Financial Planning and Management for Small Business equips readers with the necessary fundamental knowledge and advanced skills to succeed in small firm and business settings. With a unique combination of topics from finance, small business management, and entrepreneurship, the book prepares readers for the challenges of today's economy.
Entrepreneurial Finance: Fundamentals of Financial Planning and Management for Small Business begins with key concepts of small business management and entrepreneurship, including management tools and techniques needed to establish, run, and lead business ventures. The book then delves into how small business
Table of Contents
Preface xvii
Part I Entrepreneurial Perspective
Chapter 1 Small Business and the Entrepreneur 3
1.1 What is Entrepreneurial Finance? 3
1.2 Significance of the Small Business 5
1.3 Entrepreneurship and the Entrepreneur 9
1.4 The Idea and the Opportunity 12
Sources of New Business Ideas 14
1.5 From an Idea to Reality 16
Stage I: Development, Start Up, and Early Growth 16
Stage II: Increasing Growth and Maturity 18
1.6 Summary 18
Key Concepts 18
Discussion Questions 19
Chapter 2 Small Business Options 20
2.1 Starting a New Business 20
Advantages and Disadvantages of Starting from Scratch 21
Important Steps for the Right Start 21
2.2 Buying an Existing Business 22
Advantages 22
Disadvantages 23
Due Diligence 23
2.3 Purchase Options 24
Buy-Out Option 24
Buy-In Option 25
Bulk-Asset Buying Option 25
Take-Over Option 25
The Final Steps in the Buying Process 25
2.4 Franchise 26
Types of Franchise 27
Advantages and Disadvantages of the Franchise Option 28
The Legal Aspect of Franchising 30
2.5 Home Business and Family Business 30
2.6 Summary 34
Key Concepts 34
Discussion Questions 34
Chapter 3 Small Business Purchase Price 36
3.1 Asset-Based Value 36
3.2 Cash Flow–Based Value 39
3.3 Market-Based Value 40
3.4 Capitalized Earnings–Based Value 41
3.5 Financial Ratios–Based Value 43
3.6 Summary 44
Key Concepts 45
Discussion Questions 45
Part II Entrepreneurial Organization
Chapter 4 Forms of Business Ownership 49
4.1 Sole Proprietorship 49
Advantages of Sole Proprietorship 49
Disadvantages of Sole Proprietorship 50
4.2 Partnership 50
Partners’ Rights 51
Partners’ Responsibilities 51
Types of Partnership 52
Types of Partners 52
Advantages of Partnership 53
Disadvantages of Partnership 53
4.3 Corporation 54
Justifications for the Creation of Corporations 55
Organizational Structure and Management of Corporations 55
S-Corporation 56
Advantages of Corporation 57
Disadvantages of Corporation 58
4.4 Other Forms of Business Ownership 58
Limited Liability Company (LLC) 58
Professional Service Corporation (PSC) 60
Joint Venture (JV) 60
Non-Profit Corporation (NPC) 60
Cooperatives 60
4.5 Summary 62
Key Concepts 62
Discussion Questions 63
Chapter 5 The Business Plan 64
5.1 What is a Business Plan? 64
Types of Business Plan 64
Importance and Rationale 65
5.2 Contents of the Plan 66
Title Page 67
Confidentiality Statement 67
Table of Contents 67
Executive Summary 68
Vision, Mission, and Elevator Pitch 68
Business Description 69
Background 69
Product 70
Market 70
Functional Plans 70
Operational Plan 71
Management Plan 71
Marketing Plan 71
Financial Plan 73
Appendix 75
5.3 Other Elements of the Plan 76
Milestone Chart 76
SWOT Analysis 76
Critical Risks 77
Measures of Control 78
Succession Plan 78
Environmental Impact 78
5.4 Reviewing the Plan 79
5.5 Anticipating and Preparing Responses to Potential Risks 82
5.6 Financing the Plan 83
Venture Capitalists 83
Angel Investors 84
5.7 Presenting the Plan 84
5.8 Updating the Plan 86
5.9 Grooming the Plan 86
The Written Text 87
The PowerPoint Slides 87
5.10 Summary 88
Key Concepts 88
Discussion Questions 89
Part III Entrepreneurial Finance and Valuation
Chapter 6 Financial Statements and Their Analysis 93
6.1 The Balance Sheet 93
Components of the Balance Sheet 94
Balances of the Balance Sheet 96
The Cash Flow Cycle 96
6.2 Income–Expenses Statement 97
6.3 Financial Statement Analysis 99
Vertical Analysis 100
Horizontal Analysis 101
6.4 Ratio Analysis 102
Profitability Ratios 102
Market-Based Ratios 105
Operational Ratios 109
Liquidity Ratios 111
Debt Ratios 113
6.5 The DuPont Model 115
A Final Word About Ratios 117
6.6 Summary 117
Key Concepts 118
Discussion Questions 118
Chapter 7 Capital Structure and Leverage 120
7.1 Debt and Equity Capital 120
Debt Capital 120
Equity Capital 121
Debt versus Equity Financing 122
7.2 The Optimal Capital Structure 125
The Traditional Approach 125
The Modigliani–Miller Approach 130
Other Approaches to Capital Structure 130
7.3 Leverage 133
Operating Leverage 133
Operating Leverage, Fixed Cost, and Business Risk 136
Financial Leverage 137
Total or Combined Leverage 144
7.4 Summary 145
Key Concepts 146
Discussion Questions 146
Chapter 8 Profit and the Cost–Volume Analysis 148
8.1 Profit Concept Between Economics and Accounting 148
8.2 Profit Margin and Markup 149
8.3 Profit and Cash Flow 152
8.4 Profitability and Earning Power 154
8.5 When Would a Firm Start Collecting Profits? 156
Cost–Volume–Profit Analysis 156
8.6 Break-Even Quantity and Break-Even Revenue 158
8.7 Break-Even Graphics 162
8.8 Desired Profit and the Break-Even Point 164
8.9 Non-Cash Charges and the Break-Even Point 166
8.10 Profit Planning 168
8.11 Summary 169
Key Concepts 170
Discussion Questions 170
Chapter 9 Pro Forma Statement and Financial Forecasting 172
9.1 Basic Pro Forma Statements 173
Pro Forma Income Statement 174
Pro Forma Balance Sheet 176
9.2 Pro Forma and the Sales Ratio 176
9.3 Change in Sales (ΔS) and the Needed Fund 178
Financial Forecasting 178
9.4 Role of Financial Forecasting 179
9.5 Basic Steps of Forecasting 180
9.6 Types of Forecasting Models 181
Qualitative Models 182
Quantitative Models 183
9.7 The Analysis of Time Series 184
Time Series and Data Variations 184
9.8 Fitting the Model 185
9.9 Adjusting for Seasonality 189
The Simple Average of Errors Method 190
The Actual to Forecast (A/F) Ratio Method 193
The Dummy Variables Method 194
9.10 The Smoothed Forecasts 197
Simple Moving Average Method 197
The Weighted Moving Average 200
Exponential Smoothing 201
9.11 Barometric Forecasting 204
9.12 Testing Forecasting Accuracy 206
The RMSE Check 207
The MAD Check 209
The MAPE Check 211
9.13 Summary 212
Key Concepts 213
Discussion Questions 213
Chapter 10 Working Capital 214
10.1 What is Working Capital? 214
10.2 Working Capital and Profit-Risk Manipulation 215
10.3 Working Capital and Financing Strategies 218
The Aggressive Approach 219
The Conservative Approach 219
The Balanced Approach 219
10.4 Summary 221
Key Concepts 221
Discussion Questions 221
Chapter 11 Financial Management of Working Capital 223
11.1 Cash Management 223
The Required Minimum Cash 224
Types of Cash and Floats 225
11.2 Marketable Securities Management 228
Common Marketable Securities 228
11.3 Account Receivable 229
Credit Control 229
Credit Evaluation 231
Cash Discount to Speed Up Collection 233
Account Receivable Aging 235
Current Liabilities Management 237
11.4 Account Payable and Trade Discounts 238
1. The Traditional Method 238
2. The NCRF Method 239
Cash Discount for Prompt Payments 240
Cumulative and Quantity Discounts 240
11.5 Summary 241
Key Concepts 241
Discussion Questions 242
Chapter 12 Inventory Management and Control 243
12.1 What is Inventory? 243
Inventory Functions 244
Inventory Cost 244
ABC Analysis 245
12.2 Economic Order Quantity (EOQ) 245
EOQ for Quantity Discount 249
EOQ for the Production-Run Model 251
12.3 The Reorder Point 255
Determining the Safety Stock Level 255
12.4 JIT-Inventory System 260
12.5 Summary 260
Key Concepts 261
Discussion Questions 261
Chapter 13 Investment Project Evaluation and Risk Management 263
13.1 Categories of Investment Purposes 264
Replacement Projects 264
Renewal Projects 264
Expansive Projects 264
Cost-Reduction Projects 264
Conforming Projects 264
Other projects 264
13.2 Steps for Project Selection 265
13.3 Types of Projects 266
Independent Projects 266
Mutually Exclusive Projects 266
13.4 Patterns of Cash Flow 267
The Conventional Pattern 267
The Non-conventional Pattern 269
13.5 Project Evaluation Techniques 269
Average Rate of Return 269
Payback Period 271
Net Present Value 272
Internal Rate of Return 276
NPV versus IRR for Mutually Exclusive Projects 279
NPV Profile, Crossover Rate, and the Ranking Reversal 282
Profitability Index and Capital Rationing 284
Investment Projects and Business Risk 286
13.6 Risk and its Sources 287
Where Would Risk Come From? 288
13.7 Methods of Risk Management 288
Risk-Adjusted Discount Rate 289
Risk-Adjusted Returns 292
The Statistical Adjustment 295
13.8 Sensitivity Analysis, Scenario Analysis, and Simulation 297
Decision Tree 300
13.9 Summary 300
Key Concepts 301
Discussion Questions 301
Chapter 14 Business Valuation and Harvesting 303
14.1 What is Business Valuation? 303
14.2 Valuation Tools 304
Book Value of Assets and Shares 304
Market Price of Shares 304
Capitalization of Major Variables 304
14.3 Valuation Techniques 305
The Multiplier Approach 305
The Capitalization Approach 308
Varieties of the Capitalization Approach 311
Harvesting 311
14.4 What is Business Harvesting? 311
14.5 Harvesting Strategies 312
Systematic Liquidation 312
Outright Sale 313
Acquisition 314
Going Public 315
14.6 Summary 317
Key Concepts 317
Discussion Questions 317
Part IV Entrepreneurial Management and Control
Chapter 15 Basic Entrepreneurial Management 321
15.1 Planning 322
Concepts of Planning 322
The Planning Process 323
15.2 Organizing 324
Defining the Tasks 324
Functional Departmentalization 324
Range of Control 324
Delegation of Authority 325
Types of Organizational Structures 325
15.3 Staffing 326
15.4 Directing 326
Leadership and Leaders 327
15.5 Controlling 329
15.6 Business Strategies 330
Product Differentiation 330
Cost Minimization 330
Niche Creation 331
15.7 Summary 331
Key Concepts 332
Discussion Questions 332
Chapter 16 Location and Layout 334
16.1 Factors Affecting the Selection of Location 335
The General Factors 335
Specific Factors 336
16.2 Types of Business Outlets and Locations 337
Outlets by Types of Goods and Services 338
Retail Outlet Locations 339
Service Outlet Locations 340
Wholesale Outlet Locations 340
Production Plant Locations 340
16.3 Site Selection 341
Low Customer Contact Businesses 342
High Customer Contact Businesses 343
Good Visibility 343
Adequate and Proper Parking 343
Selected Quantitative Measures 344
Radius of the Trading Area 346
Expansion Consideration 347
16.4 Site Alternatives 347
Downtown Area 347
Shopping Plazas and Malls 347
Throughout Neighborhoods 347
At Home 348
16.5 Layout and Design 348
Retail Layout 348
Wholesale Layout 353
Manufacturing Layout 353
Service Layout 354
Exterior/Interior Considerations 356
Sight, Sound, and Smell Considerations 356
Environmental Considerations 357
16.6 Summary 357
Key Concepts 357
Discussion Questions 358
Chapter 17 Operations, Budgeting, and Taxes 359
Operations 359
17.1 Material and Supplies: Buying or Making? 360
17.2 Product Quality 361
Quality Control 362
Statistical Methods to Control Quality 362
Budgeting 363
17.3 Budgetary Variance and Flexible Budgeting 364
17.4 Types of Budgets 365
Operating Budget 365
Cash Flow Budget 366
17.5 Considerations for Budgetary Control 368
Taxes 368
17.6 Types of Taxes 369
Firm’s Own Business Taxes 369
Sales Taxes 369
Employment-Related Taxes 369
Owner’s Taxes 370
17.7 Taxes and Forms of Business Ownership 371
17.8 Considerations and Strategies 371
17.9 Summary 373
Key Concepts 374
Discussion Questions 374
Chapter 18 Marketing, Promotion, and Distribution 375
18.1 Market and Customer 375
The Changing Target Market 376
18.2 Marketing and Customer’s Decisions 378
Identifying the Needs/Wants 378
Searching and Collecting Information 379
Evaluating the Alternatives 379
Making the Final Choice 379
Post-Purchase Stage 380
18.3 Marketing Research 381
Secondary Data 381
Primary Data 382
Marketing Strategy 383
18.4 Product 383
Product Life Cycle 384
The Total Product 385
Product Commercialization 389
18.5 Price 389
Considerations for a Pricing Policy 389
Price Strategies 390
18.6 Place 393
Storage 393
Transportation 394
Distribution 394
18.7 Promotion 396
Personal Selling 396
Sales Promotion 397
Advertising 398
Publicity and Public Relations 399
18.8 Summary 400
Key Concepts 400
Discussion Questions 401
Chapter 19 Human Resource Management 402
19.1 Job Analysis 402
Job Description 403
Job Specification 403
Job Application 403
Job Satisfaction 404
19.2 Personnel Planning 404
Recruiting 405
Screening and Selecting 406
Hiring and Orienting 408
Compensation and Benefits 412
Appraisal and Evaluation 414
Terminating 416
Other Issues 416
The Discipline System 418
19.3 Summary 419
Key Concepts 420
Discussion Questions 420
Appendix 421
Glossary 427
Further Reading 439
Index 441
